APR: Annual Percentage Rate and Your New Home Loan

By: Karen Lawson
Loan Page Columnist

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You're looking for your first home loan. Understanding how the APR, or annual percentage rate, impacts your monthly mortgage payments and the time needed to repay your new home loan is an important part of home loan shopping.

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In recent years, mortgage rates have been historically low. When shopping for a new home loan, you might think that rates don't matter too much when they are so low. Low mortgage rates have enabled many people who could not otherwise qualify for a home loan. Once you get your loan, what role does the interest rate play in determining your payment amount?

APR and Loan Shopping

APR stands for annual percentage rate. In this column, we will consider fixed rate mortgage loans, also called FRMs. A fixed rate mortgage appeals to many homebuyers because the monthly principal and interest payment (P & I) remains the same. It may also provide security in terms of avoiding increased payments if interest rates should rise. Many lender websites offer mortgage calculators to help in determining what your P&I payment will be. Here is an example of how mortgage interest rates impact your monthly P&I payment.

Forget Lunch, Let's Do Some Numbers

You borrow $225,000 at a fixed rate of 6.25% for 30 years. Your payments will be fully amortized over the loan term, with no variable factors. Your monthly P & I payment would be $1385.36. It would take 227 payments before half of your monthly payment will be applied to the principal balance of your loan! If your interest rate is o 6.75%, your monthly P & I payment would be $1459.35, and it would take 238 payments before half of your P & I installment would be applied to your principal balance. A half percent increase in mortgage rates can significantly impact repayment of your loan.

A Little Homework Prevents Big Surprises

You don't need a math degree to find a great mortgage loan, but doing some calculations in advance can help you decide how much you can afford to borrow for a new home loan.

Source:
Fannie Mae Mortgage Calculator

About the author
Karen Lawson is a freelance with fifteen years of experience in mortgage lending. She earned an MA degree in English from the University of Nevada, Reno.

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